Strategy Number 14 – Long “Strip”

Market dATA

DJ Index

100 points

Prices

Call 100

$1,000

Put 100

$1,000

Strategy name:

Long “Strip”.

Recommended use of strategy

Expectation of volatile index but with a greater change of a decrease. Returning to the example of the elections, we forecast a higher probability of Y being expected President — driving down the index.

Strategy components

Buying 2 Put options of identical strike price.

Buying one Call option with the same strike price.

For example: Buying 2 Put 100 options and one Call 100 option.

Expenses / Income from building the strategy

Expenditure of $3,000

Strategy graph:

Auxiliary table for building the profit line

DJ Index(Horizontal axis)

(Fixed expenses)/ fixed income

Variable income(Call contribution)

Variable income(Putl contribution)

Total profit / (loss) (Vertical axis)2+3+4

1

2

3

4

5

50

($3,000)

—

$10,000

$7,000

60

($3,000)

—

$8,000

$5,000

70

($3,000)

—

$6,000

$3,000

80

($3,000)

—

$4,000

$1,000

90

($3,000)

—

$4,000

($1,000)

100

($3,000)

—

—

($3,000)

110

($3,000)

$1,000

—

($2,000)

120

($3,000)

$2,000

—

($1,000)

130

($3,000)

$3,000

—

$0

140

($3,000)

$4,000

—

$1,000

150

($3,000)

$5,000

—

$2,000

Strategy analysis:

The strategy analysis is similar to that of the Long “Straddle”.

Source of Profit

We profit when there is a change in the index.

When the index goes up, we profit on the call option.

When the index goes down we profit on the 2 Put options.

The profit is greater if the index falls.

Source of loss

The loss derives from buying the strategy and decreases when a change occurs in the DJ Index and we start to make a profit.

Break-even point

When the profit from the Call option or from the 2 Put options covers the cost of purchase, $3,000. This occurs when the index is at 130 points or 85 points.

In this case we use a strategy similar to the “Strip”, known as a “Strap” (the next strategy).